The Wize Way

Episode 71: M&A Crash Course: How to Successfully Buy Another Practice

• Wize Mentoring for Accountants and Bookkeepers • Season 1 • Episode 71

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In this week's episode of The Wize Guys Podcast,  we'll explore how to successfully navigate business mergers and acquisitions. Join Ed and Jamie, as we take a deep dive into the intricacies of this growth strategy. We'll be sharing pearls of wisdom from our wealth of experience - discussing the advantages, pitfalls, and the critical importance of striking the right loan value ratio. And here's a pro tip right upfront - keep that ratio below 50%. 

Purchasing a business isn't just about numbers and legalities - there's a significant emotional aspect too. We'll help you understand the motivations of the vendor, the value of patience and empathy, and how to spot warning signs. Jamie's got a compelling narrative of tireless pursuit, spanning over half a decade, that culminated in triumph - you really don't want to miss it. 

As we wrap up, we'll delve into the practicalities of a business acquisition. Enlighten yourself on the pros and cons of transitioning an acquisition over different periods, the keys to successful joint branding, and the measures to ensure a smooth and seamless transition for the clients. Plus, Jamie delivers some essential tips - from ensuring the cultural fit with the vendor to carrying out due diligence and risk assessment. So plug in, and get ready for a riveting conversation filled with insider knowledge on successfully navigating practice acquisitions!

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PS: Whenever you’re ready… here are the fastest 3 ways we can help you fix and grow your accounting firm:

1. Download our famous Wize Freedom Strategy Map for FREE - Find out the 96 projects every firm owner must implement to build a $5M+ firm that can run without them - Download here

2. Need to Hire right now? Book at 1:1 FREE hiring assessment with our WizeTalent recruiters to help find your next best employee locally or offshore – Click Here

3. Book a 1:1 Wize Discovery Session – Spend 30mins with our Wize CEO, Jamie Johns, a $7M firm owner who is ready to give you his entire business plan to build a firm that can run without you – Find out more here

Ed Chan:

You've got to master leading yourself. So that's about self-discipline, that's about experience, that's about controlling your feelings. So you've got to lead yourself.

Brenton Ward:

From Wize Mentoring is The Wize Guys Podcast, a show about accounting and bookkeeping practice owners and the many stories, lessons, and tips from their experience of transitioning from a time-pull practice to a business that runs without them. I hope you enjoy and subscribe. One of the interesting topics we've gotten at that has risen in a number of conversations recently now one-to-one is mergers and acquisitions how to essentially purchase another practice and Ed and Jamie are well-versed in this strategy. Now, Ed, you've got a good few scars from this strategy, but you've also got a lot of wins and experience to share. So I want to peel back some of the layers of the practical steps and the things to consider when looking at an acquisition for the practice as part of the growth strategy. So where should we start with this conversation? Ed? I'd love to hear a little bit of your experience in this area of growth, and then we'll move to Jamie to get some of the nitty-gritty practical steps.

Ed Chan:

Yeah, sure Thanks, Brenton. Obviously, to grow your business there are just four ways to do it. So the low-hanging fruit ones are the first two getting more referrals and selling more services to your existing ones. Y ou can download the monetization sheet from Wize Vault to help you sell more services to your existing clients. They're the two low-hanging fruits that you should be doing, to begin with. But the other two ways to grow your business are just digital marketing, doing the marketing side. And the last one is acquisitions and mergers, and this is the topic of today, which is acquisition and mergers. So we call them tuck-ins, but as predominantly going out there and buying an existing firm. There are advantages and disadvantages of doing that, and let's talk about the advantages first and then we can talk about the disadvantages.

Ed Chan:

But the advantage is that currently, the interest rates are very, very low. So you can get a loan for an interest rate of somewhere between 3.5% and 4.5% as an interest. The KPIs numbers in an accounting firm are the cost of goods sold runs at about 40% and your fixed overheads run at about 35%. So your profit, your EBITDA, should run at about 25%. Of course, if you're making 25% EBITDA and it's only costing you 3% or 4% interest, you can do the maths yourself and you can see that the profit's going to pay off the loan not just the interest, but also the principal.

Ed Chan:

Now, with an acquisition, though, the numbers are much better than that With an acquisition, because your fixed overheads are fairly fixed. So you're not doubling your reception or you're not doubling your fixed overheads. Your fixed overheads, instead of being around 35%, like they would in a normal business, could only be set at about 10%, and if you've got some spare capacity within your existing staff, your cost of goods sold may not be 40%, might be sitting at 30% or even less. So you can actually take out between 50% to 60% profit, as opposed to your own firm, which is sitting at around 25% profit. So, in pure numbers, it makes sense to do so, because often you know that profit that's sitting at 50% to 60% goes straight to the bottom line and it funds the loan itself.

Ed Chan:

And if you structure it correctly, then you don't have to borrow money for the first installment. The second and even the third installment is paid by the profits from the practice itself. So it's funded itself and within a few years you could actually you know, two to three to four years you could actually pay the loan off with the profits. So it's quite a good strategy moving forward. But there are some downsides and if you don't do it right you can actually bite yourself because people say to me I don't want to borrow money, but it's not the loan that's the problem, it's the inability to service the loan that's the problem. So the first thing is don't be fearful of that, because you're using that loan to buy an asset. We're all accountants. We know there's a debit and there's a credit.

Ed Chan:

So as long as there's a debit, which is, an asset you don't mind having a loan, which is the liability, because one offsets the other and you're back to zero. But the real risk is if you stuff it up and you know, as I said, it's okay to have a loan as long as you've got an asset offsetting it, but if you stuff it up and you lose that asset or you lose a portion of that asset, then the worst thing is that you end up with a loan or a debt without an asset against it, and that's where the risk is. So it's important that, if you're going to embark on the strategy, that you do it properly and not risk the asset, because often you know, I've seen people left with a loan and they've lost half the clients. So they've lost half the asset and they've gone backwards.

Brenton Ward:

Okay, we want to touch on some of the downsides to the strategy and the consequences of going going ill-equipped or not ready. But before we do that, when should a practitioner consider the strategy, and at what point in their journey? Because we do speak to a lot of practices who are very eager to get into this area of acquisitions, but you know, if the house isn't in order or if there are cracks in certain parts of the business, it can lead to fairly problematic circumstances. So when should a practitioner consider this?

Ed Chan:

Okay, the first thing is if you've really got a lot of existing debt I wouldn't want to do it if your loan value ratio, your LVR, is more than 50%. So you want to keep your loan value ratio below 50% and, as I said earlier, debt's not the problem, it's the inability to service the debts the problem. And if your LVR is more than 50%, it actually puts pressure on your serviceability. So that's the first thing. The second thing is to make sure your house is in order, because you know we talk about leverage. Leveraging good things means one good thing plus one thing. Good thing gives five good things. But if you don't get your house in order, you can also leverage bad things, which is one bad thing plus one bad thing gives you five bad things and it can actually turn your existing business, which may be going quite well, into a bad business because the purchase that you've encountered or you've got yourself into. So make sure your house is in order, make sure your team structures are right, make sure your FAB5 is working well and they're all showing a trend in a positive going upwards. Clients are happy, you and your senior managers return your phone calls to your clients on the same day and you're not taking two or three days to respond. Your numbers are looking good.

Ed Chan:

The FAB5 is made up of your turnovers going up, your profits going up, you're getting more new clients than you're losing. So we tracked in the FAB5 and your NPS, your Net Promoter Score. Your surveys with your clients are giving you nine out of 10, 10 out of 10. The clients are rating your service at that level and your staff are happy. So once your API is, in the up trend, then in your LBR it's not too high.

Ed Chan:

Then at that point, you should consider you know this strategy and of course, you've extracted as much as you can from the referral process, from the monetization sheet, and you've got a good, robust marketing strategy going, because even when you buy a firm, they'll scrutinize you, they'll come in and they'll want to know who you are. So you've got to have a good website. You've got to have some good social media goings. There's some credibility within your organization because when you buy clients they're at a heightened level of suspicion. They don't know who you are. They don't like being sold if you like, they're not a commodity and they're watching you. You've got to win their trust and winning their trust involves all the above, all the things that I just talked about having a presence on social media, having a good website, you know, having good communication with the clients, having an open communication with them, all the above to build the trust that's required before they'll start listening to you.

Brenton Ward:

So just on that point, how do you avoid buying a white elephant? Is it called a white elephant practice where the clients just leave quickly? Or you can't accommodate the new team and pricing.

Ed Chan:

Well, it's in the due diligence. It's always buy and beware, as everyone knows. So you've got to do your due diligence. And when you're doing your due diligence it's not an exact science but it's a little bit of a risk, because some of the clients are obviously good clients and they're bad clients, and some of them are older clients. They may only be around for another year. Some may give you two or three years. So if you're going to give you a year and you've paid a dollar per dollar for it, then you've only just got your capital back at best. So all those things are part of your due diligence. So you've got to go into it with your eyes open. You have to negotiate hard.

Ed Chan:

For example, I bought a firm from a guy who was 73 years old, and birds of a feather flock together, so he had a lot of older clients.

Ed Chan:

In the database was a substantial number of older clients, but also amongst those older clients were self-managed super funds. So you know, even though they might sell their business, they'll still continue on with their self-managed superannuation fund. So I'll get more than you know a few years out of them. So what I did was with the ones that looked they were going to sell out in a year. I negotiated 25 cents and a dollar and my argument to him was that my recovery was four times and if I couldn't get four years' worth out of it then it wasn't worth it. And if I could only get one year out of it, it was 25 cents a dollar. If I can get two years out of 50 cents, three years to 75 cents and four years was a dollar per dollar. So I went through each of the clients and negotiated on that basis, and there's a whole swag of other things that you got to consider as well. That they're just a few.

Brenton Ward:

Okay, that's a great point. I think that in itself is worth noting down and we want to get to some of the practical steps and tips in a second. It's certainly part of the due diligence process. But, Jamie, I wouldn't mind you weighing in here because yourself got a few successful acquisitions under your belt. You've also got a few scars over the years as well undertaking this strategy. So I wouldn't mind getting your insights and kind of overarching experience on this topic of acquisitions. We'll move into some of the practical steps.

Jamie Johns:

Happy to share.

Brenton Ward:

Tell us about why you embarked on the strategy before working with Ed. Have you done an acquisition? How is the process different after using the Wize way?

Jamie Johns:

Yeah, before I met Ed, I did one and did everything wrong, and then, previous to that, I've done everything right in other ones. So look, I think, following on what Ed said, from a strategic point of view, they can be very profitable if you get it right, because you're simply getting economies of scale. So you'll bring across if you can successfully bring across, the clients and then also the teams and the relationships. In a lot of the cases, you don't have the additional overhead. So if you've already got office space, for example, if you just think about all the overheads that you've got, office space is one of the biggest ones but again you've got internet, telephone, all your insurances, and everything, so you get quite a bit of economy of scale.

Jamie Johns:

The biggest mistake you can make is trying to change everything. So rule number one, or M&A 101, is the fewer things you change, the better. When you go ahead and do it, that's when you've got a deal together. Definitely don't try and change things. Ed said people don't know you, they don't know your firm, and humans by nature are very suspicious of change. Clients don't like to know that they've been sold, they've got to be aware of all that sort of thing. So you know, the biggest mistake is there are too many changes. The most successful is when you only make changes once you've got The only way to get trust is time, and you can't rush these things with people or clients or the firm or the people that you buy. So they need to get to know you, they need to get to trust you and once you've got trust you can then start slowly making change, but ever so carefully at the same token. So you know now, from a practical point of view, whether that's software systems or just procedures or policies, anything like that will really rub people up the wrong way. So you know you might think they're small things, but they're not small things. With people, small things are the big things. You know it takes good leadership to make sure that you don't try and rush the process.

Jamie Johns:

It's extremely important I couldn't emphasize it enough that once you do get a deal together, you don't rush the process. And what you've got to remember a lot of firm owners have never done this before. You know they've started their accounting or bookkeeping practice years ago. They'll only ever sell it once in their entire life. So you've got to have a lot of empathy and first seek to understand before being understood because they've just never done it before. So they're going to potentially rely on you a lot to make the merger and the acquisition successful.

Jamie Johns:

And that's what I found, and it's not always what's best for you. Every time I speak to a firm owner, there's always something different about it. And so if you come from the point of view of what's best for the firm owner not just because you're buying a firm put their needs and wants first, and if it suits the acquisition, well and good. But if it doesn't suit you to buy it or doesn't suit the vendor, then you're better off just guiding them and stepping back, because in the long run, you'll gain a lot more credibility and trust and there'll always be another time.

Jamie Johns:

And what I found is accountants talk, people talk about reputation and all that sort of thing. So it's really important that you put the vendor first and then if the deal can be successful and everyone gets a win-win, then go ahead and work through it. I always talk, and what he taught me was about the big rocks, the pebbles, and the sand, and perhaps we can touch on some of the big rocks because I can tell you now if you start talking about the details of a contract, you'll scare the hell out of people. It's like any relationship. I don't care whether it's an employee's or if you've got a date. If you try and get into the details too fast, it just doesn't work. So you've just got to follow those rocks, the pebbles, and the sand and algae, or I'll never forget Ed telling me that, because I never forgot it.

Brenton Ward:

Tim at Causbrooks, you guys are going to have an acquisition yourself. Any sort of insights on the general experience?

Tim Causbrook:

Yeah, thanks, Brenton. We're quite about a million dollars in fees, like a year before. We met Ed about four years ago now. What we found was that the vendors just kind of were in cruise control and did what they usually did, and exactly what Jamie said. They didn't know how to sell the firm, and what I mean by that is I didn't know how to integrate it into our practice, and so you've really got to lead them, and Ed always says the hardest people to lead are the owners, and that goes for vendors as well.

Tim Causbrook:

They might have a lot more experience than we do in terms of years and they did in my case but they'd never been acquired before, and so I really had to guide them and help them restructure their own team and prepare it to continue without them being there anymore. I couldn't really know that enough, and that's just kind of Stephen Covey seeking to understand before being understood. You've really got to see it from their shoes, and everyone's different, as Jamie said. They might have different reasons for selling. Sometimes you might deal with multiple partners in the same business. They might have different agendas as well, so you couldn't do enough due diligence, as Jamie said, to patients and if you see any warning flags. Just back off it, okay?

Brenton Ward:

Yeah, what I'm hearing from what I've seen from the guys going through this journey. Typically the numbers are fairly easy to stack up and assess whether it's a good opportunity or not. However, the big variable in this situation is typically the emotion involved of the vendor, and we're talking business owners who have largely got most of their identity and their experience wrapped up in their business, and now they're offloading into a stranger, essentially. So talk to us about some of the things we need to be mindful of on that front, where you've seen practice owners walk into an acquisition situation prematurely or ill-equipped to navigate that, and some of the consequences we can avoid by having an awareness of this.

Ed Chan:

Yes, when they're embarking on selling their practice, it's the next stage in their life, which is, you know, it's like everybody wants to hold off going to a nursing home. So you know, you get pulled along this journey. So it's like a roller coaster. So one minute they're ready to sell, next minute they pulled back, they've changed their mind, next minute they want to sell. So you get pulled along on this roller coaster and you're just going to be patient. You're just going to understand it from their point of view because it's a huge, huge change. It's their identity, it's who they are or it represents them. So they're giving that up. So that's a big thing. So the second thing is that purchasers always see things from their own point of view. And they go in there and they want to do things like well, up the prices and we change this or do this and do that. You can't see it from your point of view. You've got to see it from the client's point of view because the clients don't know who you are. They're at a heightened level of suspicion, the things that they're really, really, really worried about. Prices are you going to increase your prices on me, you know, and the vendor who's leaving. I've been dealing with this guy or girl for, you know, 20 or 30 or 40 years and then now they're leaving. And then who are you? I don't even know who you are. And they're also used to dealing with the staff. So clients are used to dealing with existing staff. So now they're concerned about the existing staff leaving. And often they're used to going to premises in a particular area and often the purchasers that go in to buy a firm close down the office and they move everything to their own office, and that has an effect as well on the clients. Now, clients don't like change. So if you go in there seeing it from your own point of view, not from the point of view of the clients, then you're going to do everything wrong. So if you see it from the client's point of view, those things that I mentioned are right up there, and overriding all of that is change.

Ed Chan:

People don't like change, and if you're going to impose change on them, let's be honest, you're not imposing the change. It's actually the vendor that's imposing the change business, the vendor who's selling. However, you just got caught in the crossfire, and in this crossfire, there's going to be collateral damage, and the collateral damage is made up of the following there's some clients that the vendor has been looking after that have been planning to leave him already, or her already, and they're just waiting for this chance to you know for the vendor to make some changes and they're going to leave anyway. So a certain percentage of clients are like that and it could be, you know, 5% and then the other amounts, or the others that will end up leaving, are the ones that have been told that you know the vendor is retiring or selling and then they're willing to give you a chance. But they're at a heightened level of sensitivity. So the minute you do something that's slightly different, you know you're a bit slower to ring them back or anything that's slightly different. They don't like that, right, they're gone, right? So you have to accept that. So that's the reason why there's a retention. So retention takes care of those kind of clients that will be leaving.

Ed Chan:

To be fair, I haven't seen if you manage it properly, I haven't seen more than the loss of 20% of the clients. That's a broad statement. I do agree, because there are obviously instances where you will lose more than 20%, but in the main if you do it right, you don't lose more than 20%. So generally the arrangement is that it's 80% paid upfront and 20% at the end of 12 months, which means that at the end of 12 months if you lose 20%, then that's okay because you haven't paid for it. You don't want to be paying for the vendor always taking that on the chin. But if it does go up above the amount that you agreed with, then you don't pay for that. It's just part of the purchase. So if existing clients refer you to new clients, then the new clients will offset the clients that have left and the net at the end, if it's above the agreed amount, then you don't pay for that and you don't pay for anything more than the 20% in this particular example that I was using.

Ed Chan:

But the main thing for everyone to realize is not to go in there and start changing everything for at least 12 months. You don't leave things the way they are forever, but you leave things the way they are for 12 months until the clients have got to know you a little bit, because at the moment, as I said, they don't know who you are. They're a heightened level of suspicion and the slightest thing you're going to put them off. You want to avoid all that. So keep these prices the same, keep the way that the vendors dealt with them the same, and only once you've got to know them and you've spoken to them, they trust you. Then you can start making small changes.

Ed Chan:

I've seen people go in there and up the prices or put clients on direct debits, and immediately, because they're seeing things from their own point of view, they're not seeing it from the client's point of view, and then they end up losing all these clients. So it's a very simple one, but it's not that easy to see things from the other person's point of view, of course. But if you want to be effective, you want to be successful, you have to see from the other person's point of view. They're the most successful people that I know, the ones that are very conscious. They have high emotional intelligence, they have a high level of consciousness about how other people are thinking or feeling and they seem to know how to press the right buttons with them to get the best outcomes from those people. And then I see people who just go in there and just do everything the way they want to do it and they don't care about anybody else around them, and they generate the ones that fail. They lack a lot of emotional intelligence.

Jamie Johns:

Yeah, I'd just like to bring to us a bit of a fine balance. You can't get the vendors or the clients offside that's like rule number two but at the same time, if that vendor's retiring, you have to transfer the relationships. So you've got to have a professional process that walks a fine line with understanding the client's personalities around, whether they're early adopters, middle adopters, or late adopters and Ed uses the analogy of some clients are crystal glass clients and some are rubber cup. So you need a really good strategy, and selecting the right people is key in trying to get the relationship from the vendor. Obviously, he's selling and he wants to retire or move on to the next stage of life. So it's a tricky bit too is you've got to get the relationships across Brenton from the vendor and whoever else to the right people.

Brenton Ward:

Yeah, nurturing another one the way.

Jamie Johns:

While we say no change, there has to be some change.

Brenton Ward:

What's no change, Ed? Is that for accounting and bookkeeping firms or just accounting firms?

Ed Chan:

With the bookkeeping firms. They're in constant touch with the client, so the transition is a lot shorter because you're in constant touch With accounting. Sometimes you don't see these clients for 12 months, so you're only really connecting with them once a year. So the transition period is a lot less with bookkeeping and the best acquisitions I've seen is over a couple of years. The ones that are like the vendors want to be out tomorrow. They're the ones that become problematic. But the best way is to transition over a couple of years. So you know, letting the clients know this is what's going to happen On this date we're going to jointly brand the new company and then in the following year, you drop off the old branding.

Ed Chan:

So you bring it in very slowly. In terms of the vendor, they should provide a few months free of charge in introducing you to the new clients, and in that period it could be three months where they do all the introductions for you. Obviously, the eight, the really big clients, should be a face-to-face introduction. The smaller clients can be done by email or letter, but then you should have them available for PR kind of work where sometimes you may need to have the vendor there for a meeting, and then after three months you may pay for that server, that level of PR that he'll bring by helping transition these clients across. But the longer the period of doing it, the better it is.

Ed Chan:

But just to give you an example, we've just bought one recently and we started talking to the clients about a year before we pulled a trigger on it. We started co-branding it and then we told them that on this particular date, the handle was going to occur and then it did. Then in the meantime, we're introducing the clients to the new senior client manager. And then our free period ran out. So we started paying the vendor for the introductions, but only for introductions, and touchfoot. It's been going pretty well so far.

Brenton Ward:

How do you facilitate joint branding in the most straightforward ways? That over everything? Websites, engagement letters, emails just old stuff. You know.

Ed Chan:

Obviously, your existing clients won't need to know about the new purchase, so you don't want to disrupt your existing clients too much. There is a little bit more effort but it leads to a better outcome. So for the clients that are getting purchased, you know a joint letter here with the vendor's name, big letters at the top, and in conjunction with your company. So there's a little bit of exposure to the clients. So getting a little bit of exposure. The second year you drop the other guy, the vendor's branding, his website, or his or her website. You could make changes to that to bring your brand into it.

Ed Chan:

For emails, we run a separate email for the new clients that are coming through and it's all got things like you know, in conjunction with yourself or any kind of wording. Like the main thing is just to get a little bit of exposure of your brand onto them so that it's not a shock to them. And the longer you do it over a longer period of time, the better it is. So the worst thing that can happen is you know an overnight thing One day it's this brand, next day it's that brand, and that's the worst thing. People don't like prizes like that, yeah.

Brenton Ward:

I'd like to talk about some of the practical steps of commencing this process, the first being how to identify some acquisition opportunities and, in the typical path, one of the common paths will be through a broker. But I think, if this is going to be a strategy undertaken, there may be some other things that you consider. So where do you find these opportunities?

Ed Chan:

To start with, using brokers is fine, but at the moment this is surprisingly around the world and we're getting this from our members in America as well but the demand is far, far greater than the supply. So I've been told by brokers that when they advertise a firm for sale, they'll get over 150 applicants and then they've got to screen all of them because not all of them are the perfect match and they're looking for that perfect match. So the first thing obviously is through brokers, but there is a huge demand for it. The second thing, which Jamie has done very well, is to go hunting for them yourself. So you might say where do I get the database for that? Well, Jamie is from a small town called Ballarat, so he knew all the accountants that are around Ballarat and then he just sent them a letter, and then he just followed up and followed up and followed up and had coffee with them and some of this has been working progress for five or six years. He'll tell the story to you himself, but he's been working on that for five years. And then finally the guy said I've been getting your letters every year and I used to put them aside, but then I wasn't ready to sell, but now I am. So I'm now ringing you.

Ed Chan:

So you've got to sow seeds. So if you don't sow seeds and you say to me, oh, there's nothing for sale, well then you haven't put the effort in. So you've got to put the effort in. You've got to sow seeds. If the more seeds you sow, then hopefully one of them will come to fruition. But if you sit back and expect it just to land on your plate, it's not going to happen and the brokers out there aren't thinking about you because they've got the demand is so great. They won't be thinking about you. So you've got to be a lot more proactive. And Jamie's been very proactive and he's had quite a few purchases, more than me, the bugger. He's done very well. So he's relentless in following up. He just won't give up. He says, I won't give up until they say no or they die.

Brenton Ward:

Jamie, you've been in the trenches of this for the last couple of years and you've done it very, very well, so I wanted to come back to the very beginning of this process of starting to have an awareness of who may be in the market to acquire. This is a long runway project with a lot of respect, so can you talk through us about your experiences of sending rifle shot letters, talking with practice owners over a number of years, and how you've approached the strategy to find the right candidates to acquire?

Jamie Johns:

Yeah, we'll sort of go back to what Ed said earlier. Like, you've got your foundations right. So you want to make sure the majority of your current clients are running essentially without you because you'll need to dedicate time to this. I mean, doing M&As is a classic quad 2 activity. It's not urgent but it's important. So first of all, you get your foundations right. Ed sort of gave a good checklist earlier when he mentioned the Fab 5. So that was a good checklist there.

Jamie Johns:

And then what my approach was, again when I was being mentored by Ed, was we did rifle shot letters. So basically in a practical sense, I jumped onto Google. We had Office Aver and Gizman or Sunbury and then Office in Ballarat and I just sort of did a search of what accounting firms were in the local area. And then I kept the database and I looked at their website and you could sort of get an idea of their size because sort of like the 80-20 rule, 80% of them would have their team on there, and as soon as you know the number of people and sort of the number of owners, like you get a rule of thumb of their size. And then I tried to track down the name of the owner of the firm within the 20k radius. In a practical sense, that's exactly what I did and I still do. Then I send the letters out the rifle shot letters.

Jamie Johns:

What's the message in?

Brenton Ward:

The rifle shot letter.

Jamie Johns:

Yeah, I think there are a couple of examples in the wise vote actually. But look, it just says that your firm is in the process of expanding. You know we're keen to talk to firms that may not have a succession plan in place. So it's fairly general, it's not too sort of official and over the top, it's just. If you're interested in talking to us, let us know In one particular case.

Jamie Johns:

In my example, the vendor sat the letter in his entry for about over 18 months. So I nearly sat there close to two years and I love to tell this story because it's true and you know it got to the point where you know the letter is probably at the bottom of his tray and he finally grabbed it and then he called me and that's what he told me. So that's just an example and it's really a quad-two activity about building relationships. Another chap that I rang about nine months past At the time I just rang on the phone. You know, another way is just to sort of do a bit of a cold call if you've got enough confidence. So I would just do a bit of a cold call and say who I am or whatever, and then leave a message to call me back with a few sort of details and you can just sort of introduce yourself like that and often I'll say look, I know it can be an uncomfortable conversation with some people, but what generally happens is when someone gets to a certain age or whatever it may be or thought process, it's in their back of their mind and what happens? You sort of just draw it out because they might have had some sort of circumstance happen, whether it was their partner, or they get to a certain point in life, they look at the next stage and then you just use sort of trigger it. You sort of think, okay, well, maybe I really do need to think about my succession. In one particular case, someone rang me back and they had a legal health issue and that was just something that sort of motivated them as well. So it's really a quad 2 activity. You've got to sow seeds, Brenton, you've got to fertilize the ground, and it's not when you're ready. It's like Ed says, it's when they're ready. But when they are ready, have a guess, who's at the top of mind? So it'll be you. The other avenue is they might have your name from your rifle shot letter off from the phone call or back in their mind, or a lot of firms approach brokers as well. You know they'll go to a broker to list their firm for sale as well and then often the broker will try and facilitate sort of an introduction.

Jamie Johns:

Of course, but that's in a practical sense how I did it. Just jumped on Google, and looked at the firms around me. You get an idea of their age, their size, and again you've got to look at the economies of scale. I always plan four times as much as I do. So when I mean by planning I look at when I get down to the nitty gritty, I look at the capacity planner, I look at the team design, who's going to transfer the relationships, just some of that really practical sense. What cost savings do you have? So I would always have our P&L and then their P&L and then a third column call combined, you know, and you can get a really good idea of how your new business is going to look with that firm merge with you. So a lot of planning things and you can't plan for everything. But by G's you can avoid a lot of heartache if you do plan.

Brenton Ward:

Absolutely. One of the resources I want to jump into in a second, Jamie, is the risk assessment of an acquisition, but you mentioned before about the pebbles, the sand, and the rocks methodology. Talk to us about how that's applied and what that actually means in this initial process of you know, identifying an opportunity for acquisition, and you've approached the opportunity. What does it mean, then, to go through pebbles, sand, and rock just to bring that to life?

Ed Chan:

Well, the big rocks are making sure there's an alignment between the vendor and yourself. For example, you know, if the vendor is not ready to sell and he's not ready to sell for two years, but you want to buy right now, so that's a big rock, okay, because you're not going to interest in talking to you because he's not ready for two years, you know. Another big rock is making sure that. Are you interested in taking the office over, in other words moving into his office or her office, or are you planning to move the office to your office? So that may have a bearing, you know. So he may not want to do that. That's the end of discussions, and you may not want to have a second office. So there are the big rocks. Before you go into, you know the detail, the clients and the contracts and that kind of stuff. Because if those the reasoning for the big rocks, small rocks, and sand is, you know, in order to get the maximum into a bucket, you know you put the big rocks in first, then you put the little rocks in the maximum and the last thing to do is put the sand in and you can fit the most into that bucket. But if you get the order wrong if you put the sand in first and then the small rocks, then you won't get the big rocks in. So that's the idea of that concept to get the big rocks right, get the alignment right, get the timing right. So in our rifle shot letter, we often say in the rifle shot letter the best sales, sales, and purchases of firms happen over a two- year period. So if you're thinking of selling then you should start planning for it two years ahead of the actual date that you want for it to happen. And of course, the other really attractive thing in the rifle shot is that generally if you sell your practice for a broker it will cost you, you know, about 30 grand minimum. But if you deal with this directly you'll save that as a minimum. It could even be 40, 50 grand in the broker's costs. So we just list down all the benefits of dealing directly with us, including the two- year period. It takes time to negotiate, takes time to do the due diligence, it takes time for the clients to transition. So when it's done properly and over a two- year period, then works much better. So they're the big rocks Now. If they don't agree with any of that then there's no point in going to the sand or to the small rocks. So you have to get alignment upfront. So you do that by having a coffee with them, having the conversation, you know, feeling things out.

Ed Chan:

And what I've always done is I always try and comply with the vendor because I've got a long runway.

Ed Chan:

You know I'm not out of this tomorrow, I'm in here for the long run and it takes two or three years to buy this firm. Then that's what I do. So I work with the vendor so that you know, with his or her timing and his or her requirements, and to try and be as conciliatory and to fit in as best I can, because they're going through a very traumatic time in their life because there's a change in their life. It's, like I said, the next step to a nursing home, so to speak. So nobody wants to take that step. So it's a very emotional period of their lives. So I'm very conscious of that, I'm very showing a lot of empathy towards that. And then I work in with them and I try not to put any impediments in front of that process, because it's so, so hard to find and if you've got to concede a little bit on terms and timing. That's what you have to do in order to secure the purchase.

Brenton Ward:

That makes sense. And, Jamie, you had a couple of other practical points that you wanted to flag.

Jamie Johns:

Yeah. Just another one to mention is really do your due diligence. You're looking to do a business deal with someone, so don't just go into it with rose-colored glasses. And one of the questions you want to ask the vendor is whether has he tried to sell the firm before. Just ask these questions because you'll be surprised at what you hear. So you want to make sure the cultural fit and, I would say, integrity works well with the vendor and yourself, and I'm just talking from practical experience. So make sure the cultural fit's good, and that you're both people of similar integrity. That's number one. And you have to flush that out by asking some tough questions.

Jamie Johns:

Often a vendor will be pretty keen to sell and sometimes they will make it sort of look overly attractive in terms of their staff. Oh yeah, such and such deals with the clients and so forth. So you've sort of got to cut through some of that noise and if you ever go to do this, make sure you understand the ability of your own team. You can't sort of wear rose-colored glasses around this because if you find a tuck- in of $200,000 or $100,000 or $500,000 or $1,000,000, you've got to have the team strategy worked out and got to know the ability of who's going to deal with those clients. People need to be in the right seat. If you've got finders who are in the wrong seat or vice versa, you've got to be aware of that as well. So it takes a lot of leadership and I learned everything I could from Ed, but then I think the practical experience was just a good teacher as well, and you learn by doing.

Brenton Ward:

Jamie, I've got a tool that you've created and you've used as part of your process for your acquisitions. Did you want to touch on this tool really quickly?

Jamie Johns:

Yeah, Ed and I, we sort of put that together. But some of the main points there are just around. Well, it probably comes down to that little quote there with Warren Buffett it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Essentially what that's saying is I'd rather pay more for a company that's got less risk in it, that's run really well. And I think that's true in accounting firms, which sort of leads to the segway to really around that risk assessment there so often.

Jamie Johns:

The longer the retention the better. So one year is pretty short. I've seen people say I want one year, but I think two years is even better in terms of retention. And what is the size of the retention? And we've got there is the retention about 20% or more. If I could get a 30% or 40% retention I'd probably pay more. It's just less risky. Because the whole thing with the attention is, as Ed has always said, you don't end up with debt and no clients. That's the worst outcome you can have. So when you negotiate the retention, it's a big rock. It's absolutely critically important that you feel comfortable with the retention terms.

Jamie Johns:

The other one. If the clients are going to, how far are they from your office? Is the office such an important? You know there are a lot of firms these days that are fully virtual, so the landscapes change a little bit post- pandemic. But consider other client base used to go into the office. Is that what they're used to? And how far away are you? Is the vendor going to stay on? You know the vendor might have known the clients for 30 years or 20 years or whatever it is. So are they going to stay on? Is it one year or two years? And I think Ed touched on that.

Jamie Johns:

You know what about the working papers? This can be a real grenade. You can get into a firm and find from a tax and accounting point of view that there are no Division 7 A lines. You know the work and papers are terrible. And then you as a firm, when you come in, say bookkeeping is a total mess. How are you going to communicate to the clients that you've just bought that their books are a mess? How are you going to tell them that we've got a big Division 7A- like payback? So look out for those hidden grenades. Are the key and senior employees going to stay on board? That's you know it's almost a big rock it's. You know, have you got other key people going to stay on board? So you know you want a round of letters. You want to communicate correctly. Is this merge a positive thing? How are you going to communicate that? Are you going to send letters before and after and that sort of thing?

Jamie Johns:

Next, you know purchase a vendor, agree that no changes should occur to the clients, formalize a handover policy, like actually have a policy that's in writing and you've signed and agreed to it. And joint branding Ed touched on that earlier. You know we used to have been part of the Skygroup for one or two years. You know just a little thing on the email part of the Skygroup. So you're dripping on the clients. And then you know I used to love having a planning day prior to settlement, you know. So prior to your settlement, just have a bit of a planning with the vendor and so you just sort of communicate and line up your ducks. So that little tool there. You know if you're sort of, depending on how you answer it, it gives you a bit of a graph of the more read you see the worth, the more risky there is. That makes sense.

Brenton Ward:

Makes perfect sense. Jamie, thank you so much for walking through those practical tips. I know this is quite a hard strategy to navigate, so with all the resources you've created around this, the only final thing to remember is, as Ed said, it's a long runway.

Jamie Johns:

I'll just have to tell you one for every probably three lines of communication or three potential acquisitions I've had. You know one might come off. So you know vendors are very nervous, they delay it, they swap and change and you've got to be focused on this to get the outcomes. It's a quad two, but it's important that you persist and be consistent. For every sort of three conversations you have, you might have one that comes off.

Brenton Ward:

Perfect and final tip of action for everyone walking out of this session today.

Ed Chan:

A really good tip is to get a database of accounting firms. You can actually go to a tax agent's board and sort of publicly list it out there so you can just pick out the firms you want to talk to, but it doesn't list the areas, I think it's just the names. So that could be a great way to get a list of targets for you to work with. And, as Jamie said, it's a long runway in that process. You got to start it today and you may not get an acquisition in two years time, but you know you got to sow seeds, keep sowing seeds. You got to send those letters out. You know, do the activity. If you don't do the activity you won't get a result. So do the activity.

Brenton Ward:

Great Guys. Thank you so much for the insights today. I hope everyone's appreciated the little nuggets of gold there. If you're looking into this strategy, If you do have any other questions on this, we'd love to see you continue the conversation in the WISE Tribe. Thanks for tuning in. If you liked this episode, please remember to subscribe and leave us a five- star review. For more practical Wize tips on how to build a business that runs without you, head over to wizementoring. com/ podcast to download a free copy of the accountant's 20- hour workweek playbook. We've included a link in the show notes below. See you in the next episode!